H. B. Fuller Company

Good morning and welcome to HB Fuller's Fiscal 2020 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded I would now like to turn the conference over to Barbara Doyle. Please go ahead.

Good morning, and welcome to HB Fuller's fiscal 2020 second quarter earnings call for the fiscal quarter ended May 30th, 2020. Our speakers are Jim Owens, HB Fuller President and Chief Executive Officer, and John Corcoran, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will take your questions. Please let me cover a few items before I turn the call over to Jim. First, a reminder that our comments today will include references to non-GAAP financial measures and references to organic revenue, which excludes the impact of foreign currency fluctuation and the impact of acquisitions and divestitures. On this call, unless otherwise specified, discussion of sales and revenue refer to organic revenues, and discussion of EPS, margins, or EBITDA refer to adjusted non-GAAP measures. These measures are in addition to the GAAP results in our earnings release and in our forms 10-Q and 10-K. We believe that discussion of these measures is useful to investors to assist the understanding of our operating performance and the comparability of results with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure is included in our earnings release. Also, we will be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Many of these risks and uncertainties are and will be exacerbated by COVID-19 and any worsening of the global business and economic environment as a result. Actual results could differ materially from these expectations due to factors discussed in our earnings release, comments made during this call, or risk factors in our Form 10-K filed with the SEC and available on our website at investors.hbfuller.com. Now I will turn the call over to Jim Owens.

Thank you, Barbara, and welcome to everyone on the call. Last evening, we reported strong results for our second quarter. Solid revenue performance, lower raw material costs, restructuring savings and operational efficiencies across our business, drove EBITDA of $101 million in the quarter, which exceeded our expectations. Cash flow also continued to be strong in the quarter, with year-to-date cash flow from operations up 40% versus last year. Our robust cash flow performance keeps us on track for our full-year debt paydown plan of $200 million. Our results reflect HB Fuller's leadership in the adhesive industry, the vital nature of adhesives in essential products, and the culture of collaboration we've created with employees, suppliers, and customers around the globe. The HP Fuller team proactively addressed challenges presented by the COVID-19 pandemic and gained market share while reducing costs and keeping employees safe as we successfully applied what we learned from the outbreak in China to our operations in the rest of the world. Throughout the quarter, all of HP Fuller factories were open and operational. By rapidly implementing health and safety protocols and business continuity plans around the world, we were able to successfully protect employees, maintain efficient operations, and deliver products to customers. We also found new ways to collaborate internally and externally and accelerate customer wins and internal productivity during this period. Over the past several years, we have invested in electronic and virtual collaboration tools that have proven invaluable during this period. We leverage these investments to facilitate fast decision-making, maintain high levels of customer service, and develop new customer relationships. In several cases, we shortened the sales cycle through virtual product trials. Sales trends during the second quarter were in line with the expectations we provided in our Q1 call. Sales levels varied around the globe and by market segment, but overall were down in March and weakened into April and then May, and have shown improving performance in the end of May and June. We successfully met increased demand for certain markets in hygiene, health, and consumable adhesives, which were up 7% organically in the quarter, including double-digit growth in a number of end markets. HHC adhesive sales surged in March, were strong in April, and moved back to more typical levels in May as customers moved toward more normalized inventory levels. End markets and engineering adhesives experienced the biggest impacts related to the pandemic, reflecting the significant downturn in global production as countries locked down during the quarter. The biggest impacts were in transportation end markets and for construction-related goods such as insulation glass, panels, and woodworking. We had positive volume growth in new energy and technical textiles. We expect improving sales performance in engineering adhesives in the third quarter as global production begins to ramp up. Construction adhesives had a good start to the quarter in March, and activity slowed in April and May as contractors and distribution channels minimized inventory given the reduced ability to access building interiors and overall uncertainty in the construction industry. As building permits have started to pick up in May, we are seeing increased project activity and order volume in June, especially in roofing. Results varied by geography as China saw strengthening performance and overall organic growth of 1% as performance strengthened in all segments throughout the quarter. Latin America and the Middle East felt the COVID impact later than other regions and are not seeing a recovery in June. We expect these regions to see improved year-over-year trends later in Q3. Despite significant negative impacts from the pandemic on several end markets, our total organic sales declined by 7%, which we believe is better than the overall performance of our end markets. This performance reflects the broad diversity in our customer base and products and our capabilities to meet technical adhesive needs of manufacturers around the world. Meeting the supply assurance and operational needs of our customers more effectively than competitors enabled us to increase share in several markets over the quarter, which will improve revenue performance going forward. In addition, benefits from raw materials, restructuring efficiencies, and rigorous cost management supported strong EBITDA and cash flow. Raw material costs continued to move lower in the quarter, supporting Q2 margins and strong cash flow. We expect further declines in raw material purchase prices through the rest of the year. From a P&L perspective, this will deliver a more favorable benefit in the second half of the year. We reorganized into three global business units at the beginning of the year, which is helping us win with customers and execute more effectively. The organizational realignment is expected to generate $35 million of total annualized savings, of which $25 to $30 million will be realized in 2020. We delivered 7 million of SG&A savings in the second quarter in these projects. We continue to proactively assess our business for additional efficiencies. And in the second quarter, we initiated a review of the company's manufacturing operations and supply chain, utilizing the support of an external consultant. The goal of this phase was to identify opportunities to streamline and improve efficiencies in our large facilities, to establish a roadmap towards site consolidation and to accelerate our inventory reduction strategy to improve supply chain planning. Based on the specific projects identified, we are initially targeting $20 to $30 million in manufacturing cost savings from these initiatives. We expect these savings to have a small impact in Q4 of this year, ramp up in 2021, and reach full year run rate levels in 2022. We are also targeting an inventory reduction of approximately $25 million through these initiatives. We're in the process of finalizing these projects and will provide a more detailed view of savings, timing, and the cost required to achieve them during our third quarter earnings call in September of 2020. As a result of the proactive steps we have taken to serve customers during the pandemic, to address new business opportunities, and to drive savings and efficiencies in our cost structure, we will be a stronger company better positioned to grow as the global economy recovers. Now I'll move on to our segment results in the second quarter on slide four. Organic revenues and engineering adhesives declined by 20% driven by the impact of COVID-19 on end market demand. Automotive and transportation related markets were the hardest hit, while new energy and technical textiles showed good volume growth in the quarter. Adjusted EBITDA margin of 14.9% was lower than last year, driven by volumes, but up 250 basis points versus the first quarter on lower raw material costs and restructuring savings. We continue to see strong profitability improvements in construction adhesives despite construction activity being impacted by COVID-19. Organic construction adhesives revenue were down 15% in the quarter with declines in both the roofing and flooring businesses. Retail channels remained strong for do-it-yourself activity, but contractor work decreased dramatically. Utilities and infrastructure business grew by mid-single digits. Construction adhesives EBITDA margin of 17.7% was up 140 basis points year-on-year, reflecting new product solutions and improved product mix related to last year's portfolio repositioning, as well as operational improvements from the restructuring. The underlying operational improvements in this business position us for strong margins in this segment as construction activity resumes. Organic sales in hygiene, health, and consumable adhesives were up 7% year-on-year in the quarter, with double-digit growth in hygiene, packaging, tape and label, and health and beauty. Some of the favorability early in the quarter was related to temporary inventory build. However, increases from changes in consumer behavior associated with more eat-in-the-home and work-in-the-home trends are expected to be longer lasting. We also know that some of the growth in Q2 is related to market share gains associated with being in a superior position to meet customer needs during the crisis, and that effect will also be longer lasting. HHC segment EBITDA margin of 14% improved 70 basis points year-over-year, driven by strong volume, favorable mix, lower raw material costs, and savings from the restructuring of the business. Our planning assumptions for the third quarter have been developed in an environment that continues to evolve and is difficult to predict. COVID cases are escalating in Latin America and India, and there is uncertainty on new case trends as other countries open up. and the recessionary impact of COVID is still unclear. Our core planning assumption is that COVID-related shutdown impacts will continue to abate, but recessionary forces will result in economic contraction in the third quarter, which will likely extend into the fourth quarter of this year. We expect the second quarter will have the most acute impacts from COVID-19 with sequential improvements in the third and fourth quarters. Elevated demand for hygiene and health products, packaging, paper tissues, and towels will likely continue through the year as consumers continue to spend more time in their homes. HHC growth will moderate in the second half of the year from second quarter levels as certifying dissipates and manufacturers work down inventory levels. Strong revenue performance in construction adhesives during the first quarter continued into the early part of Q2 but slowed dramatically in April and the first part of May. Our forward orders for construction adhesives improved over the last month, resulting in increased demand in June, and we expect this level to continue through the third quarter. In total, we forecast construction adhesive revenues in the third quarter will be down versus prior year, but down less than in Q2. Likewise, engineering adhesive demand has picked up throughout the last month. While we expect continued soft demand versus 2019, we are seeing improved top line and profit performance relative to Q2. Transportation-related industries will be weaker than other segments such as electronics, new energy, filtration, and textiles. We anticipate the demand for the transportation, durable goods, and construction-related markets will start to improve in the third quarter, supporting sequential improvement in engineering adhesive volumes as we exit the year. Raw materials benefited margins in the second quarter, and we continue to plan for lower raw material costs over the rest of the year. This will be driven by supply demand dynamics. Improving volume trends, lower raw material costs, and reduced working capital requirements will enable us to drive strong cash flow. This supports our plan to pay down debt, $200 million this year, and to pay dividends of approximately $34 million. which HP4 raised in April for the 51st consecutive year. While the economic backdrop continues to evolve, our new organization has enhanced our line of sight into our three businesses. This improves our visibility and fosters our bias for action. As we've demonstrated in our first half results, we are executing our strategy well, our operations are nimble, and we have multiple levers to deliver strong results in a fast-changing environment. Now let me turn the call over to John Corcoran to review our second quarter results and our outlook for the fiscal 2020 based on these planning assumptions.